The imperial CFO

Date: 16-06-2016
Source: The Economist: Schumpeter

Chief finance officers are amassing a worrying amount of power

THE days of imperial CEOs have long gone. Today’s chief executives do their best to contain their egos and, instead, project a modest image. They talk about “servant leadership” and make a point of cultivating their “stakeholders”. Many bosses leave the limelight to company founders and big-name investors. And yet a new authority figure has emerged within companies, much less exuberant than old-fashioned autocratic CEOs but just as determined to amass power: the imperial CFO.

Chief financial officers barely existed 50 years ago: company accounts were administered by mysterious people called “comptrollers”. Today, CFOs are at the heart of all the world’s big firms. They are the only corporate officers other than the boss who are able to monitor every corner of an organisation. They are the only executive other than the chief who is feared by everybody: a “no” from the CFO means that your precious project is dead. Russell Reynolds, a search firm, calls them “co-pilots”. At one high-profile company, Twitter, the CFO, Anthony Noto, is arguably doing most of the piloting.

Finance chiefs play a growing role in shaping the scope and direction of a company. They no longer wield the red pen just on the basis of what they see in the accounts. They do so through the prism of corporate strategy, which they are deeply involved in setting. They allocate capital with a view to bringing that strategy to life—evaluating how well a particular scheme fits into a firm’s long-term vision and counting out the beans accordingly.

CFOs also play a growing role in overseeing corporate operations. Two decades ago, they seldom took their noses out of their spreadsheets. They now spend much of their time inspecting operations—dropping in here, there and everywhere to see what the accounts mean in practice. This detailed knowledge of the corporate landscape increases their influence.

The other province colonised by CFOs is external relations. They spend plenty of time talking to investors, board directors, regulators and other stakeholders.Analysts will often pay more attention to the views of the finance supremo than to those of the ultimate boss. Ruth Porat, who is currently CFO of Alphabet, Google’s parent company, and previously had the same job at Morgan Stanley, a bank, is particularly influential on Wall Street. The same can even be true of boards: Leo Apotheker’s days as CEO of Hewlett-Packard were numbered when his CFO, Cathie Lesjak, told the board that she strongly opposed his decision to buy Autonomy, a software company.

These rising powers are well rewarded for their growing clout. In 2014 the median pay for a CFO at an S&P 500 company was $3.8m. (The highest-paid, Patrick Pichette, Google’s CFO until last year, took home $43.8m.) Though this was lower than the top dog’s remuneration, the gap is narrowing, with CFOs winning slightly larger pay increases than their bosses, particularly in bigger companies. CFOs are also gaining power within what might be called the shadow ruling class—a network of boards, chairmanships and quangos that hire the CEOs and mark their report cards. EY, a consultancy, says that in 2012 almost 50% of CFOs at the 350 largest global firms sat on the boards of other companies, compared with a figure of 36% in 2002.

Several things explain the rise of the CFO. The shareholder-value movement played a role in promoting them and giving them a bigger role in setting corporate goals. Andrew Fastow, who was convicted for his role in the demise of Enron, was an ominous early occupant of the co-pilot’s seat. The Sarbanes-Oxley legislation that was brought in to clear up that mess codified the CFO’s role as the CEO’s partner at the top of the corporate pyramid. The financial crisis of 2008 focused even more attention on managing costs. CFOs also have more powerful tools than ever to monitor what is happening in their organisations. They have access to lots of data and computing power, which allow them to build up a timely picture of what is going on.

It is hard to work out whether an imperial CFO is a good thing. Encouragingly, there is growing diversity and professionalism. Women hold 13% of CFO positions at America’s leading companies, against only just under 5% of the top jobs. Today’s finance chiefs are better trained than their predecessors, and more likely to have degrees and experience in a broad range of corporate functions. Sarbanes-Oxley and other legislation has forced CFOs to be more careful about following the rules.

Emperor’s new clothes
But the example of Mr Fastow should serve as a warning. CFOs have shorter job tenures than CEOs—a little over five years on average at American listed companies, compared with seven years for the boss. They also owe a higher proportion of their pay to performance than any other corporate officer other than the CEO. At the same time they are subjected to a welter of conflicting pressures—acting as spin-doctors and bean-counters as well as corporate strategists and auditors. EY, in a recent report on finance bosses, begins with a warning that “it’s become a job that may be too big for any one individual to do well.” The growing number of tools at a CFO’s disposal may allow them to measure corporate performance more accurately but it also enables them to shuffle figures to produce the best results.

In 2013 Mr Fastow explained his behaviour on the ground that he thought “that’s how the game is played…You have a complex set of rules and the objective is to use the rules to your advantage.” Finance chiefs may expend more of their efforts nowadays satisfying regulations, but they also spend a great deal of time using devices such as “internal charges” (transfer pricing) to concentrate the company’s profits in countries with the lowest taxes. The term “imperial” is never a good thing when applied to a corporate officer—in particular when that individual’s principal job is to keep his company on the straight and narrow.